examples

the game of life

What makes the real world (or 'the game of life') so complex? To grasp its complexity, let us compare life to a notoriously difficult game like chess.

motive

Chess has a single motive: to win the game by capturing the opponent's king. Thus, strategy is not a part of chess. A player does not have to identify his own motives, nor worry about his opponent's motives. Chess is mere tactics.

The game of life is largely strategic. Your own motives may be difficult to know and may be changing. But the same is true of other players' motives. You are just guessing at them. Nor do you know when they change.

information

Chess is a game of complete information. You know the exact location of the pieces on the board.

There is a 'fog of life', like there is a fog of war' on a battlefield. In the game of life, you may not know which pieces your opponent has, nor how many, nor where they are. You may not even be sure about your own pieces.

predictable

Chess is predictable. Chess-pieces are only allowed to make specific moves. These moves do not change.

Life is unpredictable. The pieces and their moves change all the time.

number of players

Chess has only two players. As you are getting ready to crush your opponent Queen's wing, you do not need to worry that Kasparov will walk through the door, plant a handful of pieces on the board and announce that he is joining the game as a third player.

Life is a multi-player game. Outside influences interfere with your neatly defined playing-field, only to disappear again when least expected.

infinite choices

Chess moves are finite. Each turn offers many allowed moves to choose from. However, the number of moves is not unlimited. With a little work, all possible moves can be listed.

In life, there is no limit to the number of moves that can be made, nor any limit to the possible variations of a single move.

turn based

Chess is turn-based. Your opponent will politely wait for you to finish your move.

Life is not turn-based. No one is waiting for you to make your move. Rather they continue making moves of their own.

This is why an all-encompassing Theory of Decision Making escapes us. Life is too complex to be reduced to a theory. Perhaps this is a good thing. It is what keeps the game of life interesting.

Consequently, we have to contend ourselves with analyzing specific situations, and try to make sense of those. Let us take a look at some examples.

offence and defense

Decision-trees are a great way to analyze turn-based games. But they are not as useful in the game of life. However, I will use them to make a point about offensive and defensive tactics.

Suppose we have a house that we would like to sell. Selling is our strategic motive. The house is worth $ 500,000. Our neighbor shows interest. He plays hard-ball, telling us that he is only interested in picking up a bargain. But he may be posturing. In reality, our neighbor may be looking for a property adjacent to his. If the latter is the case, he has no choice but to buy ours.

In our analysis, we have two options:

• Ask High ... ask for $ 600,000.
• Ask Low ... ask for $ 550,000

We believe that our neighbor has three subsequent moves:

• Offer High ... $ 450,000
• Offer Low ... $ 400,000
• Walk Away ... no offer

We believe that when we Ask High, there is a real chance we scare the neighbor into Walking Away. However, when we Ask Low, there is no risk of the Walk Away scenario. Assuming that parties meet each other in the middle between our price and the neighbor's offer, the decision tree now looks as follows:

First, let us pretend to forget about the Walk Away scenario. Now, when we choose Ask High, the resulting sale-price will be $25,000 higher in both the Offer High and in the Offer Low scenario. So whatever our neighbor does, we are better off starting with the Ask High scenario. This is called our 'dominant tactic', and we should choose it.

However, let us now assume that the Walk Away scenario is a possibility. The crucial question is just how much this worries us. Is it a fail-scenario or a disaster-scenario? In the latter case, we should never make a move that opens up this scenario.

Since our neighbor chooses his moves of his own volition, we can not risk the Ask High move. Only by Asking Low can we avoid the possibility of the Walk Away counter move. Because a disaster-scenario is possible, we are compelled to a defensive tactic.

On the other hand, we may not be too worried about our neighbor walking away. We may feel that there are plenty of fish in the sea. In this case, Walk Away is merely a fail-scenario. We are once again at liberty to execute an offensive tactic: Ask High.

the FDA

In the above example, offensive tactics yield the best results. This is often the case, and applies as well to the next example: the Food and Drug Administration. The FDA must grant permission for a drug to be sold in the USA. This does not put the FDA in enviable position. What if a drug turns out be unsafe? Even if only a handful of patients die, the media will be all over the FDA. Heads will roll.

The FDA chooses 'to err on the safe side'. It does so by tying up a new drug in lengthy proceedings, or even denying an effective drug entry to the market. The absence of these drugs may cost untold millions their lives. But the media will never notice.

So the media-coverage forces the FDA into a defensive tactic. Bad press is a disaster-scenario. And this problem is unsolvable, at least for the FDA.

The above examples teach us a simple lesson: you want to employ offensive tactics whenever you can. But the major, strategic point is that you should never maneuver yourself into a position where you are forced to employ defensive tactics. That is one of the secrets of great strategy!

You have heard the phrase that one should always have 'a plan B' or 'an exit-scenario'. I would concur, and above is the reason why: if you have a plan B, you can play offense in plan A. Without a plan B, you are compelled to play defense in plan A.

counter-tactics

In many games (for example chess), it is possible to predict your opponent's moves, although not with 100% accuracy. The game of Rock, Paper and Scissors (RP&S) is different. It needs 100% unpredictability.

Once a player becomes predictable, the winning counter-move is obvious. In other words, RP&S is open to counter-tactics: your opponent does not choose a move on his own motives, but simply selects the winning counter-move. He can do so only because of your predictability.

a middle class drama

Counter-tactics are worth mentioning because they are so prevalent. Consider a little middle class drama: an adolescent son that steals from his father. He may never be found out. But even if the theft is discovered, the son can predict that his father won't go to the police. He can predict that his father won't trash him, for that would be child-abuse. Finally, he can predict that, over time, his father will forgive and forget.

In real life, stealing is a losing tactic. The son knows this. But the particular predictability makes stealing from his father a lucrative endeavor. The son has discovered a counter-tactic.

poker

Poker is such an interesting game, because the winning tactic is a counter-tactic. When the table is aggressive, you need to play tight. When the table is passive, you need to open up your game and steal a couple of pots.

Poker is even more interesting because the winning tactic is also sub-optimal. If you consistently play your strongest (optimal) move, you become predictable. Your predictability will cost you more than you gain from your strong moves, because your opponents can employ a counter-tactic against you. You need to make the occasional mistake, in order to maintain unpredictability. Therefore, the winning tactic is sub-optimal.

terrorism

The 1970s saw left-wing terrorism in most western countries: for example the Rote Armee Fraktion in Germany, the Brigate Rosse in Italy and the Weathermen in the USA.

In fact, left-wing terrorists became active in many different countries simultaneously, spontaneously and independently of each other. The terrorists cited capitalism and (ironically) militarism as their official grievances. Luckily, after 1980 terrorist-activity declined, again roughly simultaneously in different countries. But why? Certainly not because the official grievances had been resolved. The roaring 80's were a period of laissez-faire capitalism and cold-war armament.

So what was the terrorists' true motive? There is no generally accepted narrative that explains the tactics of left-wing terrorists. Sometimes, their attacks are dismissed as 'senseless', 'pointless' or 'stupid'. But that explanation does not stand up to scrutiny.

Indeed, incidental actions may be pointless. But left-wing terrorism was not incidental. Cells sprung up in many countries, independently of each other. And terrorism abated roughly simultaneously in these different countries.

The following rule can be chiseled in stone: stupid/senseless actions are much rarer than actions dismissed as stupid/senseless. What happens frequently is that we fail to understand the strategy of other players. We fail to understand what their true motives are, because they are foreign to us. But it would be closed-minded to dismiss other players simply because we don't understand them. And, we would be fooling ourselves.

Left-wing terrorism made sense because it softened up the resistance to respectable left-wing institutions, such as socialist parties or labor unions. Once respectable lefties had risen to power and had become part of the establishment, terrorism abated. The rise to power was the left's true, strategic motive.

This is not to suggest that the respectable lefties were conspiring with the terrorists. They were not. The 'terrorist-mechanism' simply works because no terrorist is an island. In the 1960's prominent lefties wrote incendiary articles. Peaceful demonstrations featured incendiary slogans. This sowed the seeds. In the 1980s, the now-respectable lefties spoke out against the terrorists. This removed the implicit seal of approval. The terrorists became isolated, and either withered away or joined the ranks of the respectable.

To achieve the motive of gaining power, terrorism was one of the tactics employed. It is just another example of a counter-tactic, feeding on predictability. Our society does not hold a group accountable for the behavior of some of its members. Punishing an entire group is called racism or fascism, and we are allergic to the mere appearance of it.

This predictability opens up a counter-tactic. A few members of a group can strike against society with near impunity, because the terrorists are expendable. Losing a few pawns is easily outweighed by the group's collective gains.

Terrorism causes attention to be paid to the group's demands. In order to prevent future attacks, the entire group is rewarded. (Interestingly, rewarding an entire group is not considered racism or fascism.)

(It is probably no coincidence that the left criticized the establishment as 'fascist'. One might argue that this was pre-emptive criticism. An establishment fatigued by a barrage of verbal attacks, is less likely to act vigilantly against terrorists.)

pin-pricks

Terrorism can not go beyond pin-pricks, painful as they may be. If terrorism becomes an existential threat, society abandons its lofty principles in a heart-beat.

But when terrorists restrict themselves to pin-pricks, we know that we lose more from racism and/or fascism than from terrorism. We choose to appease the terrorists. Therefore, terrorism can be a lucrative counter-tactic.

It would then follow that the Nazis were one of the few to effectively combat terrorism. After all, they were not afraid to be called fascists. In the Czech Republic, the Nazis wiped entire villages of the face of the earth as a reprisal for the assassination of Reinhard Heydrich. The Nazis knew that there was no connection between the villages and the assassins. But there was no need for a connection. The Nazis simply wanted to punish the group, i.e. the Czech people. Indeed, these reprisals resolved the "terrorist threat" against high Nazi officers quite effectively. The Czech government in London never again attempted to assassinate a high-ranking Nazi-officer.

good & evil

One may wonder why there is so much evil in the world; and why evil thrives. The reason is simple. Evil is unpredictable, keeping all options at its disposal. Good is predictable because it always needs to be good.

Let us take a completely hypothetical example. Two countries dispute land. Country A is a true democracy. In country B, a terrorist entity won the elections and controls the government.

Country A abides by international law and the human rights, even during actual fighting. Country B utterly and completely disregards human rights.

Country B fights its war partly in the media, because it gets funding from displaying itself as a victim. The most effective way is to decry human rights violations by country A. It is irrelevant whether these violations actually happen. The funding is secured by the act of decrying.

The result is a classical counter-tactic. Country A abides by the human rights, but is chastised for violations in the media. Country B kills young and old, soldier and civilian indiscriminately, but is never reviled for it. In fact, the terrorism of country B is said to be caused to the despair of its people, which in turn is blamed on country A.

Country A has one essential problem: predictability. By imposing the standard of international law upon itself, it restricts its own moves. Country B has no such problem.

A crucial strategic insight is to avoid predictability. Of course, some predictability follows from your identity, and cannot be avoided. A democracy needs to be predictable in applying the rule of law. But there is a lot of avoidable predictability. For example: grandstanding.

grandstanding

The Obama administration (2008 - ...) hugely increased government spending. The annual deficit quadrupled from 0.4 to 1.5 trillion. The result was a sky-rocketing national debt.

(1 T$ is a trillion dollar.)

It is now the summer of 2011, and president Obama is seeking an increase in the debt-ceiling, the maximum debt that the USA is allowed to incur. The president is facing resistance from the Republican House. Obama has offered the Republicans a choice of two alternatives:

• A package deal, comprised of:

  • raise the debt ceiling,
  • raise taxes to pay for the increased debt, and
  • a further increase of spending with $ 60 billion.

• Keep the debt ceiling as it is. That implies that the USA will not be able to meet all of its financial obligations.

When viewed in this manner, president Obama's choice of alternatives is absurd. After all, the debt-problem was caused by an increase in spending, not a decrease in government receipts. However, the president's alternatives are motivated by his bid for re-election in 2012. From that perspective, Obama offers the Republicans:

• to contribute to Obama's re-election by raising the debt ceiling and allowing generous entitlement-spending on the Democratic electorate, or

  • to contribute to Obama's re-election by shutting down the government, for which the Republicans are expected to take the blame.

win-lose environment

Now, it must be remembered that American politics is run by a two party system, and consequently is a win-lose environment. A party can win on its own merits. But failing that, a party can win by demoralizing or humiliating the other party. A demoralized party has a lower voter turn-out at the polls.

Why does Obama not offer to reign in government spending? It can be argued forcefully that this would be the sane thing to do. It would have provided a path out of the debt crisis, and would have given the US economy a much needed boost. In a sane world, all of this would have contributed to Obama's chances for re-election. But recently, the chances of Obama being re-elected on his own merits are looking dim. Demoralizing the Republicans is his best hope.

grandstanding

The root of the Republican predicament lies in something that happened before the 2010 mid-term elections: virtually all congressional Republicans signed the No New Taxes Pledge, promising never to raise taxes under any circumstances. Republicans committed the sin of grandstanding: of publicly announcing that you limit your options. Grandstanding provided Obama with the predictability on which he could employ a counter-tactic against the Republicans.

Once Republicans were committed to No New Taxes, the win-lose environment of American politics ensures that Obama needs to introduce new taxes. As said, this humiliates the Republicans and offers him a chance at re-election.

So paradoxically, grandstanding the No New Taxes Pledge ensures that the other party must relentlessly pursue new taxes. A similar scenario played out in the 1990's when Republicans signed on to the Contract with America. Wherever possible, grandstanding should be avoided.

motive-driven tactics

No man is an island. You need others to achieve your motives. These may be people, groups, corporations or institutions. These players come in many shapes and sizes: allies, competitors, superiors, monopoly-holders. And over time players may change their roles: your allies become your opponents; your spouse becomes your divorcee.

How are you to make sense of this cacophony? The rule-of-thumb is: Everyone pursues his own motives.

A strategist must discover what motivates the other players. This may be harder than you think.

• Players have a tendency to conceal their true motives. This is only natural. Implicitly, they understand that predictability makes them vulnerable to counter-tactics.
• Players may not be able to articulate their true motives.
• Players may be delusional, fooling themselves about their true motives. While a pop-singer may be involved in charity, his true motive is media-attention to boost his record-sales. But he would never admit it. Not even to himself.

Suppose you have a pretty good handle on the motives of other players. From this, you can predict their behavior. This lets you choose your tactics. You know that someone with conflicting motives will, sooner or later, oppose you. That player should never be your ally. And if that player can be excluded from the game, so much the better.

Players with parallel motives can be your partners. Partnerships come in all sizes and tastes: a business-partnership, but also a committee or a marriage. Even an employer-employee relationship can be viewed as a partnership.

The essence of a partnership is that you obtain combined strength at the price of extra vulnerability. You put your fate in the hands of your partners. If they turn against you, you have a problem. If they follow a course contrary to what you hoped for, you have a problem.

A partnership will be successful as long as (and only as long as) the partners have parallel motives. To better explore this, let us look at the position of the venture-capitalist (VC).

• The VC provides money to a company, in order to make money for himself.
• The VC has only two ways to make money:
  • annual dividends,
  • selling his shares at a profit.
• The VC is not involved in day-to-day business; management runs the company in his stead.

The VC has a pretty bad position. He needs management to turn the company into a profitable enterprise, but can exert no influence himself. What is more, the VC has a looming motive-conflict with management. Every dollar that goes towards management's pay-check, comes out of the VC's dividends. It's even worse when the company does well and management gets comfortable. Management will not want the VC to sell his shares, because new ownership is a potential threat.

Strategically speaking, the VC is in a partnership with management. But the partners do not have parallel motives. In fact, they have conflicting motives.

This quagmire could have been avoided. Management's paycheck needs to be proportional to the dividends that the company pays to its share-holders. The decision to pay dividends needs to be made by the shareholders. The bylaws must stipulate that the VC has the option to replace management at will. And when the VC sells, management must be entitled to a piece of the cake.

riding piggy back

The challenge is to partner with players with parallel motives. But parallel motives do not have to be identical motives. Suppose you own a high-tech start-up and you are looking for funds. You find a venture-capitalist who you believe to be status-driven. You believe that 'bragging rights' for funding a high-tech start-up are his true motive. If you feel safe your venture can generate its share of publicity, then this venture-capitalist is the perfect match for you. This is true even if you are profit-oriented. Your motives are different, but they run parallel.

Things become even sweeter when your partner has parallel motives and has more at stake. Suppose the joint company is your partner's only source of income. Even if you have a larger stake, your partner has more at stake. You can ride piggy back, resting assured that your partner will go the extra mile.

As long as you have parallel motives, your only worry is whether you should vacation in the Caribbean or the Mediterranean.

conflicting motives

Let's return to the house we wanted to sell (but now the neighbor does not play a part). We list the house with a realtor. The realtor works on no cure no pay basis, getting paid only when we sell. We feel safe that the realtor is a player with parallel motives.

Sadly, the narrative is more complicated. Suppose the house is worth $ 500,000. Given a realistic 10% variability, the realtor can sell the house for $ 550,000 at the most. That earns him a 3% = $ 16,500 fee. At that price, the house will be on the market for at least a year. The realtor will have to go through two showings per month. The realtor's fee breaks down to $ 690 per showing.

Or the realtor can sell the house effortless for $ 450,000, which is 10% below its worth. If the first showing results in a sale, his fee is $ 13,500 per showing! On top of that, the realtor has some very good reasons for wanting to sell our house below market:

• the realtor's reputation profits from a quick sale,
• during the 12 months, we may become impatient and terminate the listing,
• a below-market listing attracts people who can be steered towards other properties.

It follows that as soon as we have signed the listing, the realtor turns into our worst enemy. He will be putting pressure on us to drop the price, or make other concessions, only to accommodate the buyer.

Thus, the listing contract between a realtor and a seller is strategically faulted. Once again, it is a partnership with conflicting motives. However, it can be fixed easily by the following fee-schedule: 25% of the sale-price above $ 500,000. This gives the following earnings to the realtor and to us:

This fee-schedule accomplishes true parallel motives between our realtor and us. At the end of the day, this will leave us much better off.

creating parallel motives

Two partners have a joint venture for an import & export business. Sadly, the partners have fallen out. In order to avoid law-suits, a mediator has been selected. It is up to the mediator to split their joint venture in a mutually agreeable way.

To both partners, 49% is unacceptable. Even 50% does not entice them, as it only matches what they already have. In truth, both partners are looking for 51%.

The mediator's first approach is to create an even split. As best he can, the mediator attempts to allocate roughly 50% of the imports and 50% of the exports to each partner. Of course, the partners will now be competitors. Both will vie for the same suppliers and customers for their trading.

The mediator makes a crucial mistake. He creates a win-lose environment. Anything that one partner gets, comes out of the other partner's share. By striving for an even split, he makes the partners focus on the small differences. Each partner will begrudge the other.

The mediator's cardinal sin is that he creates conflicting motives. It is unlikely that this approach will result in something that both partners can agree to. As always, the solution is to create parallel motives. This can be obtained by an uneven split, and by making one partner dependent upon the other's success.

One partner should get all of the import-business, while the other gets all of the export-business. The import-business and the export-business are now mutually dependent on the other's success to continue the flow of trade. Instead of competing, they will have to cooperate. And if the mediator does his job right, both partners feel that they got 51% of the pie.

the nuclear option

How do you go from a win-lose to a win-win environment? Or, how do you go from conflicting motives to parallel motives? Hopefully, there are elegant ways like the above import-export split. But if all else fails, there is always the nuclear option.

It's a fine day and Peter and Paul decide to go boating. For sustainment, they bring two cookies. Come lunchtime, a conflict arises over how to divide them. Peter wants to share evenly, but Paul claims both.

This is a classic win-lose situation. Any crumbs that Peter eats, can not go to Paul. However, it can be transformed into a win-win situation by employing the nuclear option. Peter needs to make Paul believe that if he can not have a cookie, he will be so desperate that he will sink the boat. Of course, there is no reason to stop at one cookie. He might as well ask for both. Peter still creates parallel motives: he gets both cookies, and Paul gets to live.

Peter's success depends on his credibility. Does Paul believe that he will really sink the boat? In short: does Paul believe that Peter is crazier than he is? Peter's long-term success is also dependent on threatening the nuclear option implicitly. For if Peter explicitly threatens to sink the boat, Paul will never go boating with him again.

At time, one finds oneself in a win-lose situation with the weakest cards. Logic dictates that the players with the strong cards will walk away with everything. Your only defense may be to (implicitly) threaten a nuclear option.